Judge Permits Karcher to Query SEC Conduct

Orange County fast-food entrepreneur Carl N. Karcher and 15 others will be allowed to claim misconduct by the Securities and Exchange Commission as a defense against accusations of insider stock trading, a federal judge ruled Monday.

The decision by U.S. District Judge Edward Rafeedie in Los Angeles was one of several made in an SEC civil lawsuit accusing Karcher and other defendants of violating insider trading laws in 1984.

Karcher, founder of the Carl’s Jr. hamburger chain, and other defendants have denied the accusations. Defense lawyers have claimed that the SEC violated its own rules and policies in bringing the lawsuit and that the SEC waited too long to file the case.

In his ruling, Rafeedie found that defense lawyers can investigate the possibility of SEC misconduct. But the judge cast some doubt on whether that claim eventually will work as a defense.

Rafeedie said that so far he has seen no evidence of flagrant misconduct by the SEC. And he warned defense lawyers not to go on a “fishing expedition” in their inquiries into the alleged SEC misconduct.

The significance of Monday’s ruling will depend on what defense lawyers find in their pretrial investigation, said Arthur Sherwood, a partner with Gibson, Dunn & Crutcher, which represents Carl Karcher and his wife.

Karen Matteson, trial counsel for the SEC, interpreted the judge’s ruling somewhat differently.

Matteson said Rafeedie “basically agreed” with the agency that defenses relating to the SEC’S alleged misconduct don’t apply to the case. “But he chose not to (eliminate) them at this time,” she said.

The trial is scheduled to begin April 11, 1989.

Also on Monday, Rafeedie denied requests to try some of the defendants separately. Attorneys had argued that it is unfair to conduct one trial for all 16 defendants--including a Karcher Enterprises accountant and two Karcher relatives who live outside California.

“It unfairly combines into one lawsuit people who have no relationship at all,” said Thomas E. Holliday, who also represents Karcher and his wife.

The judge, however, concluded that it was more efficient to hold one trial, which is expected to last four to six weeks.